This invention is in the field of online financial planning, and is more specifically directed to the creation and management of trusts.
In the field of financial management, trusts are well-known vehicles for providing and managing funds. Fundamentally, a trust is a repository of assets conveyed by one party (the grantor), by way of which another party (the trustee) has legal title and control over the assets in the trust (typically referred to as the body, corpus, or res), on behalf of the beneficiary of the trust, who has equitable title to the trust assets. The trust then can accomplish one or more of the grantor's goals, which can include providing for the management of investments and other assets by a competent trustee, preventing the beneficiary from foolishly spending or wasting the trust assets, preventing creditors and others from accessing the trust property (such a trust typically referred to as a “spendthrift trust”), among others.
Many variations on the fundamental trust are well-known. For example, different beneficiaries may be provided either to share in the entirety of the trust, or in divided interests, for example with one beneficiary having equitable title to trust income with another beneficiary having equitable title to the principal of the corpus. Trusts may be established for a wide range of purposes, such as to provide education and support of minors, to distribute estate property, to maintain a pension or other retirement program on behalf of employees, to provide for living expenses of an elderly grantor by way of a so-called “living trust”, and the like. In addition, trusts may either be revocable or irrevocable by the grantor.
The use of trusts to manage and control assets for which the beneficiaries are minor children or young adults is particularly attractive. Control of the assets by a trustee of course reduces the risk of the young beneficiary dissipating the donated assets, especially if the trust is established for a particular purpose (e.g., education) for which the trustee is held accountable.
Trusts can also be used advantageously to shift taxes from a grantor's high tax rate to the lower tax rate of a child. Under current United States tax laws, once a child reaches the age of 14, income from assets given by a parent or grandparent to the child are effectively taxed at the child's tax rate, rather than the parent's or grandparent's rate. Also under current law, a gift of up to $10,000 per year, to an individual donee, may be made without incurring a gift tax, so long as the donee has immediate access to the gift. Therefore, a trust can leverage favorable tax treatment, while still preventing the child from wasting the assets.
The current United States tax laws also distinguish between types of trusts: specifically between grantor trusts, as defined under §§671 through 679 of the United States Internal Revenue Code (“IRC”), and non-grantor trusts. The distinction between these Internal Revenue Service classifications hinge primarily on the type of rights that a grantor and other parties may have under the trust instrument.
A popular trust in the United States is referred to as a Section 2503(c) trust, referring to the governing section of the IRC. Parents can fund a child's Section 2503(c) trust with up to $10,000 per year ($20,000 from a married couple) without incurring gift tax, so long as the trustee is allowed to spend some or all of the trust property for the benefit of the child prior to the child reaching the age of 21, and the remaining trust property is distributed to the child upon reaching the age of 21 (or to the child's estate upon death of the child prior to 21).
Another popular vehicle that allows funds to be set aside for a child, but controlled by an adult, is a custodial account. A custodial account typically follows the general formats established under the Uniform Gift to Minors Act, or the Uniform Transfers to Minors Act. Under either statutory format, an account is created for the benefit of a single minor beneficiary, and control of the account is vested with a person of legal capacity. The income from the account is taxed directly to the minor beneficiary, and upon reaching the age of majority, the property in the account must be distributed to the beneficiary.
The mandatory distribution at the age of majority from custodial accounts can be a significant drawback, since most persons who are eighteen to twenty-one years of age do not possess the maturity to wisely spend the trust property. A non-statutory trust (i.e., a trust other than a custodial account), on the other hand, can and usually does terminate at an age beyond the age of majority, since the grantor of a trust recognizes that a better practice is to delay termination of the trust and distribution of the trust property until the beneficiary is a number of years past the age of majority.
In this regard, another type of trust, referred to as a “Crummy” trust, can leverage the gift tax exemption under IRC §2503(b) without regard to a terminating distribution at the age of majority of the beneficiary. Under the Crummy trust (also known as a “demand right” trust), the child is provided with a window of time, for example the thirty day period after a contribution is made, to demand a distribution of the contribution; if the child does not exercise this option, the contribution remains in the trust, and the trust can continue until a later age specified in the trust.
It has been envisioned, in connection with the present invention, that many adults would like to obtain the benefits of a trust vehicle for their children's education and support. However, under conventional approaches, significant time, effort, and expense is involved in the creation and management of a trust. Typically, an attorney is consulted to draft the trust instrument itself. In addition, accounts for holding the trust assets must be established with a financial institution; these accounts may often render the selection and changing of investments rather cumbersome for the trustee. Further, the trust itself must prepare and file certain informational tax filings, annual tax returns, and quarterly tax filings and payments, and also can be subject to filing accountings with a court that may be supervising the trust. Because of these cumbersome and sometimes costly tasks, trusts for minor children have typically been reserved for large contributions, and are not cost-effective for modest sums.
In recent years, the popularity and use of the Internet has exploded. Many consumers are now comfortable with ordering goods and services over the Internet either directly from the source or by way of auction sites, and with using online payment systems ranging from credit card transactions, to ECHECK and PAYPAL payment services, and the like. The Internet has also become popular for online real-time securities trading, particularly with the availability of low-cost online brokerage services. Accordingly, many efficiencies are provided by the Internet in connection with today's economy.
By way of further background, many states and educational institutions have now created programs commonly referred to as “qualified state tuition plans” or “qualified tuition plans” (referred to in this specification as “QTPs”). These plans are governed by IRC §529, as currently effective and under enacted revisions becoming effective in January, 2002. While QTPs are administered by states and by educational institutions, the marketing of the plans and the management of the underlying investments supporting the plans are typically handled by financial institutions such as brokerage accounts, under contract to the administering state agency or educational institution. In general, QTPs permit persons (including natural persons, corporations, and other entities) to purchase tuition credits or certificates on behalf of a designated beneficiary or, depending on the particular QTP, to contribute to an account that is established for the purpose of meeting “qualified higher education expenses”. Generally, “qualified higher education expenses” include tuition, fees, books, supplies, equipment, room and board expenses (if the beneficiary meets certain enrollment and attendance requirements), that are spent in connection with attendance at an eligible educational institution.
Under current U.S. tax law, no amount distributed from or earned within a QTP is included in the income of either the contributor or the beneficiary of the QTP, except to the extent that the distributions (or deemed value of the benefits) exceed the contributions made on behalf of the beneficiary, in which case such excess is considered as gross income to the recipient (which may be either the contributor or the beneficiary).
The terms and conditions of QTPs can vary somewhat, as they are offered by different organizations and state governments. In general, though, distributions and withdrawals from QTPs that are not applied to qualified education expenses may incur tax and a penalty. In addition, because contributors can generally access the funds in the QTP accounts, these funds may be subject to claims of creditors, disposition by a trustee in bankruptcy, distribution upon divorce, and the like. In addition, the assets held in a conventional QTP can be considered in determining eligibility for federal and private educational financial aid programs.
By way of still further background, recently enacted U.S. legislation now provides for an educational individual retirement account (“EIRA”), governed by IRC §530 and its implementing regulations. Under an EIRA, persons (including natural persons, corporations, and other entities) may contribute cash to an account for a designated beneficiary, under the stipulation that distributions from the account must be used for “qualified education expenses”, which are defined under the law as the eligible expenses under a Qualified Tuition Plan, and also including qualified elementary and secondary school education expenses.
Under current U.S. tax law, income within the EIRA is not included in the gross income of either of the contributor or the beneficiary of the EIRA. Distributions from the EIRA are also tax free, unless the distributions exceed “qualified education expenses”, in which case tax and penalty may be due.
Because EIRAs are still quite new, it is possible that EIRA assets may be considered in determining eligibility for federal and private educational financial aid programs. In addition, the contributions to an EIRA by a contributor may be limited by the modified adjusted gross income of that contributor.
By way of further background, U.S. Pat. Nos. 6,064,986 and 6,085,174 disclose computer-assisted processes and systems for trust management. As described in these references, the computer systems assist in the management of retirement trusts, particularly in determining whether the retiree is of proper age to receive distributions from the trust without incurring a tax penalty. These references describe such a system and processes in which the trust is established off-line, for example by an attorney on a pre-authorized list.
By way of further background, U.S. Pat. No. 5,878,405 describes a computerized pension planning and liquidity management system, for example for maintaining an employee pension system. According to this reference, the making of loans to employees against their pension is automated by way of a clearinghouse system for the loans. The system described in this reference generates periodic reports to the participants in the managed pension plan, as well as standard pension accounting reports and regulatory reports necessitated by the appropriate statutory scheme (e.g., ERISA).
By way of further background, U.S. Pat. No. 5,913,198 describes a computer-implemented method for designing self-funded survivor benefit plans for an employer, with the design including the level of contributions necessary from the employer and employee. The contributions are maintained in a conventional trust plan, by a previously named trustee, and the computer periodically generates reports to the trustee concerning the necessary level of contributions.
By way of further background, U.S. Pat. No. 6,161,096 describes another computerized apparatus for managing a deferred award instrument plan for employees, including the automated detecting of whether life insurance ought to be purchased by a participant, and suggesting the establishing and management of a Rabbi trust for the spread between the strike price of stock options and the market value of the stock associated with the options.
By way of still further background, online Internet gift registries are well known, by way of which family members and friends may select gifts for a registered recipient. One such known gift registry is one in which the recipient selects stock in certain companies, from which others may choose to purchase one or more shares as a gift for a particular occasion.
By way of still further background, the use of the Internet to solicit gift contributions for a previously established trust is also known.